While some people may have never read a real estate investing book or even a real estate article that links quantitative easing (QE) to the real estate market, it is still an easy concept to understand. But in order to understand its impact on real estate, let’s clarify the basics of QE.
QE is an unconventional monetary policy tool used by central banks to stimulate the economy when traditional monetary policies become ineffective. Central banks, such as the Federal Reserve in the U.S. or the Bank of Canada, will buy long-term bonds or mortgage-backed securities by increasing their money supply and reducing interest rates. It is also called printing money.
This practice creates demand for bonds. By increasing the demand, it consequently reduces interest rates on bonds and on other financial instruments, such as interest rates on mortgages.
“By increasing the money supply and reducing the interest rates, what this does is that it increases the demand for housing. That’s in general,” explains MREX’s CEO Nikolaï Ray.
But if we look at the multifamily real estate market—which is what MREX focuses on—what QE does is that it injects money into the real estate market. With people and organizations having more money to invest, this situation puts pressure on the values of investment properties and creates a higher demand for those. Let’s explore the different areas QE has a direct effect on.
Real Estate Supply and Demand
Supply and demand is a basic economic principle that means when the price of a certain good or service drops or rises proportionally to its demand.
The economic principles behind how QE affects the supply and demand for homes is simple: because QE kept interest rates low, and thus making owning real estate more affordable, demand and supply for homes is boosted. Especially for investment assets, such as investment properties, QE increases the demand for housing. However, this can create bidding wars for houses if a town doesn’t have enough new homes or apartment buildings. That’s what pushes their prices higher.
But new apartment buildings can’t be built overnight. Zoning, regulations, finding lands, and getting financed are among the multiple steps before apartment buildings can be built.
“There’s a little bit of a lag in the [real estate] market between the time QE happens. Interest rates go down, there’s more money in the market to buy investment properties. So there’s too much demand and not enough supply,” says Ray.
As mentioned above, QE is when central banks buy long-term bonds or mortgage-backed securities. Central banks will create a demand for these debt instruments. The increased demand will cause a hike in prices.
Markets aim to drop all interest paid lower. By doing so, they make debt cheaper in hope for households and companies to borrow more. If they borrow more, this can boost the economy short-term as households and companies can spend more of their future revenue.
QE impacts on interest rates
The connection between QE and housing prices is simple: if QE makes homes more affordable through its effect on interest rates, such as lowering mortgage interest rates, then home prices will increase.
By lowering the cost of debt, it becomes more attractive when people are looking to buy new homes. The cheaper the mortgage rates, the more people will allow themselves to handle more debt earlier. Thus, they increase the short-term demand by allowing buyers to purchase sooner.
Essentially, central banks create demand for interest-bearing securities, such as mortgage-backed securities, by purchasing bonds of various durations. The increased demand put direct pressure on interest rates. By lowering interest rates, it becomes more interesting for investors to purchase the same property as they will be paying less in debt service.
“There’s more money on the bottom line for you,” adds Ray.
However, while QE can help increase home prices during a tight market, it does not work forever. In fact, it can lead to a market failure if market inefficiencies are pushed too far. If this occurs, QE is not very effective in boosting housing prices.